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1 Key to T-Mobile's Subscriber Growth

T-Mobile keeps adding lots of subscribers, but it's just as important to look at how many it keeps.

T-Mobile(NASDAQ:TMUS) estimates it took about 250% of postpaid phone subscriber growth across the industry last quarter. As big competitors Verizon Communications(NYSE:VZ) and AT&T(NYSE:T) lose subscribers, T-Mobile continues to snatch them up.

But on top of T-Mobile's gross additions, it's also doing a better job of holding onto its existing subscribers. T-Mobile's postpaid phone subscriber churn rate fell to a record-low 1.18% in the first quarter. While that rate's still higher than Verizon's and AT&T's, T-Mobile is seeing fewer subscribers leave while grabbing a lot of the defectors from its biggest competitors.

A look at the numbers

Here's how T-Mobile's churn rate and gross defectors compare to AT&T. Unfortunately, Verizon doesn't break out its postpaid phone subscriber numbers, although it did report a 0.9% postpaid phone churn rate. It's fair to say its gross defector numbers look similar to AT&T's.

Metric

T-Mobile

AT&T

Average subscribers

31,696,000

64,909,000

Churn rate

1.18%

0.9%

Total defectors

374,013

584,181

Data source: Company financial reports.

As you can see, the fact that AT&T has about twice the number of postpaid phone subscribers as T-Mobile means that it needs to retain customers at a much higher rate to keep the same number as T-Mobile.

AT&T boasted that its 0.9% churn rate was its best ever in the first quarter. Still, it lost more than 200,000 more subscribers than T-Mobile. Verizon may have contributed even more gross subscriber losses to the pool, considering it has more total retail customers than AT&T.

The point is, T-Mobile is arguably doing a better job holding onto its subscribers than AT&T and Verizon.

And it's taking AT&T and Verizon's losses for itself

Every quarter T-Mobile likes to touch on its porting ratios with the other main carriers in the U.S. A porting ratio compares the number of subscribers coming from a carrier to T-Mobile versus the number of subscribers T-Mobile lost to that carrier. The company regularly has excellent news to report, so it's no wonder it likes to tell everyone about them.

Last quarter, T-Mobile had a porting ratio of 2.3 with AT&T and 1.7 with Verizon. That means for every customer it lost to AT&T, it brought in 2.3 from it. That ratio has everything to do with the relative size of each company and that a low churn rate for AT&T or Verizon still doesn't mean it's keeping more total subscribers on board than T-Mobile.

And T-Mobile is only getting better at holding onto subscribers

T-Mobile's churn rate has steadily declined over the past few years.

Data source: T-Mobile financial reports.

While churn historically increases in the second half of the year, T-Mobile was able to reduce churn sequentially in the fourth quarter last year despite aggressive promotions from the competition.

There are two factors behind T-Mobile's ability to lower its churn. First, it's providing customers with more and more incentives to remain loyal. In January it said it will never increase customers' rates unless they want to switch to a new plan. It also started giving customers freebies every week.

The second factor, and perhaps more important, is T-Mobile continues to improve its network. T-Mobile recently scored extremely well on OpenSignal's State of Mobile Networks survey. It tied Verizon for download speeds, and it's quickly closing the gap between itself and Verizon for network availability.

After winning a huge swath of spectrum in the recently closed FCC incentive auction, T-Mobile is positioned well to completely close the gap in network coverage. The low-band spectrum is well suited for covering wide areas, which is perfect for building out in the rural areas where T-Mobile is weakest. The buildout will also allow T-Mobile to attract a whole new set of customers from AT&T and Verizon, putting more pressure on the two giants to hold onto their customers.

T-Mobile has successfully implemented higher switching costs into its service while closing the gap in the quality of its coverage. That's a recipe for lower churn, and investors should expect the trend to continue. As T-Mobile sees fewer defectors, it should be able to maintain the great rate of net subscriber additions it's had for the last few years.

Author

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He consumes copious cups of coffee, and he loves alliteration. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinals mania ... Follow @admlvy